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Suppose that the S&P 500, with a beta of 1.0, has an expected return of 10% and T-bills provide a risk-free return of 4%. ( LO1 )

a. How would you construct a portfolio from these two assets with an expected return of 8%?

b. How would you construct a portfolio from these two assets with a beta of .4?

c. Show that the risk premiums of the portfolios in (a) and (b) are proportional to their betas.

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